Increasing extracellular Ca 2+ induces differentiation of normal, but not neoplastic, keratinocytes. This differentiation correlates with a prolonged elevation of intracellular-free Ca2+ . Transduction of the Ca2+ signal involves both altered phosphoinositide metabolism and G proteins. Activation of protein kinase C (PKC) appears to be an important step in keratinocyte differentiation since the down regulation of PKC by the tumor promoting phorbol ester TPA inhibits Ca2+ - induced differentiation. Introduction of an activated ras(Ha) oncogene suppresses the expression of epidermal differentiation markers and induces a non-epidermal keratin. The interactions of initiated and normal keratinocytes have been studied in culture and in grafts on athymic mice. In the culture model, focal growth of initiated cells was suppressed by coculture with normal keratinocytes. Exposure to tumor promoters of several types produced foci of initiated cells, a process inhibited by known anti-promoters. In grafting studies, the keratinocyte line SP-1 produced papillomas when grafted along with fibroblasts. Simultaneous grafting of normal keratinocytes suppressed the size of SP-1 papillomas. These papillomas increased in size when treated with TPA. When hair follicle cells were transformed by introduction of an activated ras(Ha) oncogene, papillomas, as well as other tumor types, developed in grafts. The introduction of v-fos and an activated ras(Ha) gene into normal keratinocytes resulted in carcinomas in grafts. The expression of 2 proteases, stomelysin and urokinase, was elevated in fos/ras carcinomas. In chemically-induced tumors, these proteases were increased in about half the carcinomas, but none of the papillomas. Activation of the protease cascade could occur early in malignant progression.